Financial planning in Kingston is a growing industry. Financial planning has become a fundamental component of comfortable retirement — and the rules keep changing. The earlier you understand the importance of financial planning, and how it works, the better.
Do you know what financial planning means? Can you differentiate between financial literacy, financial freedom, and financial independence? Are you aware of the power of compounding returns that can make your money work for you? If you answered “no” to even one of these questions, then you are in need of financial advice.
What is financial literacy?
When you thoroughly understand how much you can save, invest, and spend — and, at the same time, update your financial knowledge with the growing times — consider yourself financially literate.
Financial independence involves making financial decisions on your own and having the ability to live the lifestyle that you want with the money that you earn yourself.
Financial freedom is what we all strive for and means that comfortable retirement is now possible.
Should you save or invest?
Well, both. These options are not mutually exclusive. If you are not able to consistently save a bare minimum of 10% of your income, or more comfortably 25%, then you are living beyond your means. You need an emergency fund that is easily available in case there is an unexpected expense. Anything beyond this emergency fund can be invested in order to increase your long-term returns.
The interest rates you receive in a bank account or GIC will not keep up with inflation. Although your money is “safe,” it is actually losing value when it grows at a lower rate than inflation.
Stocks
Stocks are good if you have a thorough understanding of the stock market and are investing with a very long timeframe, have the patience to do the necessary research to find good companies to invest in, and have enough money to invest that you can properly diversify your portfolio. It is important to be very well diversified in many companies in many industries with excellent long-term viability, but this can be very difficult to accomplish with a small investment portfolio. Keep in mind that most new self-managed investors lose most, or all, of their money in the stock market. There are many more professional investors out there, and if after some initial losses it feels to you like there is a conspiracy within the stock market to take your money, you are completely correct. In order for someone to make money in the stock market, someone else needs to lose money. It is the very nature of the stock market. Professional investors are only too happy to take your money. In fact, they depend on a steady stream of new, inexperienced investors, or “lambs”, as they are often called, in order to provide them with an easy income.
A way to increase the rate that you lose your money in the stock market is to use pattern trading or day trading. Regardless of how many webinars you sit through and how many “gurus” assure you that their “system” will beat the market, the vast majority of new investors will lose most of their savings in a short period of time. There is, in fact, a 90/90/90 “rule” that states that 90% of new investors will lose 90% of their money in 90 days.
Consider professional advice — your life savings will thank you. Keep in mind that professional advice is not free, but it will pay for itself many times over.
Bonds
Bonds are much more stable than stocks but offer a far lower rate of return. When a government or corporation needs to raise funds, you loan them an amount of money, and you get a bond in return. The government or company, after a set time, will pay you back the money along with interest, which is predetermined when you purchase the bond. The rates are usually similar to GICs and will not keep up with inflation, and unlike GICs, bonds can lose value while you own them.
Mutual funds or segregated funds (managed funds)
For anyone other than a true professional stock trader, a managed fund is, by far, your best choice. A managed fund will hold dozens, or even hundreds, of companies’ stocks or bonds within them. This creates an automatic diversification that the average investor simply cannot do on their own. This will greatly reduce your risk.
Some managed funds are sector specific, and others are more general in nature. There is such a thing as being “too diversified,” so you may want some professional guidance in making the appropriate choices. An experienced financial advisor or financial planner can help you make the correct choices — or you can ask your trusted advisor to choose an appropriate portfolio of funds for you.
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